Families and Small Businesses to be Taxed to Pay for Health Reform

Gerrit Lansing /
July 31, 2009

To help pay for its expensive and painfully complex health care bill, Congress plans on burdening families and small businesses earning over $350,000 with a surtax. Ill-conceived “soak the rich” plans devised by Congress tend to inspire a yawn, a sigh, or applause from the vast majority of citizens who don’t have to actually pay the lopsided amount of taxes that the “rich” pay. Well, as it turns out, more and more of us might actually be “rich” enough to have to chip in to help fund government-run health insurance for the masses.

The surtax proposed by Rep. Charlie Rangel (D-NY) would stand independent of the income taxes Americans are already paying. Generally, a surtax is added onto an individual or business’s taxable income. However, in a maneuver to include more tax-filers into Congress’s double-tax treasure chest (or triple-tax if you invest in anything), Congress has decided to make the surtax applicable to your adjusted gross income, or AGI. Your AGI is what your income looks like before you take out deductions like state and local taxes, medical expenses, and mortgage interest payments. So it’s a higher number than your taxable income.

How much higher? American tax-filers reported over $8 trillion in Adjusted Gross Income in 2006, yet they were only taxed on less than $5.5 trillion of it. The difference between those two numbers might be able to pay for the current health care plan twice! Only 68% of the adjusted gross income of U.S. taxpayers was actually taxable in 2006, yet the current proposed health care bill wants to change the rules and start taxing even more money to help “control” health care costs.

So how does this surtax work? The government would take 1-5.4% from those families and small businesses with an AGI greater than $350,000 ($280,000 if you’re a single filer). Let’s say you’re a small business owner in Baltimore, Maryland with an AGI of $1,100,000, the amount listed in box #37 of your IRS 1040 form. Under this plan you will be taxed 5.4% on that $1,100,000, which comes to a bit more than $59,000. However, when calculating your income tax liability, the government provides you the option of applying a multitude of itemized deductions, found on a Schedule A Form. The total of your deductions can then be filled in on the second page of your 1040. So if you’re paying a 5.5% Maryland State tax, a 3.05% local tax, $5,000 in mortgage interest payments, and another $3,000 in medical expenses, those deductions would help lower the amount you’re liable for by way of income tax, but wouldn’t put a dent in your surtax contribution. In fact, the small business owner would pay approximately $15,000 if the surtax applied to his taxable income, but because it applies to his AGI, he or she has to pay more than $59,000. That’s more than a $44,000 difference! That $44,000 might force the business owner to cut costs somewhere, and that could mean somebody’s out of a job.

And if that’s not enough to cast doubt on the proposed tax hike, the surtax may actually increase in 2013. If the President and Congress are intent on saving or creating jobs, and allowing small businesses to compete on a level playing field, this surtax doesn’t match the rhetoric.